irs congressional record 1943 income

8/12/2019 IRS Congressional Record 1943 Income

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UNITED STATES OF MERIC

ordPROCEEDINGS AND DEBATES OF THE 78th CONGRESS

FIRST SESSION

VOLUM 8 9 P A R TMARCH 2 1943, TO APRIL 5 1943

PAGES 1459 TO 2940)

UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON 1943


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1943 CONGRESSIONAL RECORD-HOUSE 579withheld at the source entitles her to a3-percent discount against the 1943 taxto which it is credited. Since she is paidtwice a month, and receives $62.50 eachpay day, the amount withheld from herwill be $9.30, or a total of $111.60 for thelast 6 months of 1943, which is approximately one-half the 1943 liability. Thiswould earn a 3-percent discount of $3.35.By prepaying the other half June 15, thisstenographer could earn a 6-percent discount on the $103.25 of the 1943 liabilitywhich would remain, or $6.50. Thus hertotal discount would be $3.25 plus $6.50,or $9.75. And in order to earn this smalldiscount, she would have to pay inyear, out of a $1,500 income subject toother deductions-such as 5 percent forretirement, 10 percent for War bonds,and so forth-$181 plus $210.25, or atotal of $391.25.Now, in comparison with the $9.75which this $1,500 stenographer wouldget, let us see what the man with a million-dollar income would get. His 1942tax would be $854,616. His 1943 tax, in cluding the net Victory tax liability,would be $899,500. By paying his 1942tax June 15, and by prepaying his 1943tax on the same date, he would earn adiscount of $53,970.The chairman of the Ways and MeansCommittee and other Members have inferred that there is no difference betweenthe withholding provisions of my bill andof the committee bill. There is a vitaldifference in this respect: The withholding UQder the committee bill is appliedin the' first instance to the payment ofthe past year's liability. Under my bill,the amount withheld is credited in allinstances .o the current liability. Thereis just as much difference between thetwo as between black and white in thisrespect. The only similarity is in themechanical details of the withholding.Where we differ is in regard to what thewithholding is credited against. I hopethat this difference is clear to the House.I appreciate very much the opportunity to enter into this dicussion on payas-you-go taxation. I do not believeanyone can approach this problem withan unbiased viewpoint without reachingthe definite conclusion that our tax collections must be placed on a currentbasis. It is a fundamental change in ourincome-tax law and one that should bedebated and discussed from every angle.The change is of vital importance to theTreasury, as well as the taxpayers. Theissue is clearly drawn and I hope thatafter the debate is over and the vote istaken it can be said of the Members ofthe House of Representatives that theyhad the courage to approve a bill thatwould remove the tax debt that hangsover all taxpayers and make personalincome tax payers current.This personal income tax indebtedness if a threat to the solvency of ourFederal Treasury and a millstone aroundthe neck of the taxpayer.Under our present law personal in come tax payers are 1 year behind. Thatis, they must pay in 1943 a tax based ontheir 1942 income. f the taxpayer suffers a serious reduction in income, orloses his job, or dies, the tax debt for theprior year becomes a serious problem.

There t.l'e two, and only two, methodsof getting the taxpayers immediately ona current basis. First, Congress can basethis year's tax on this year's income. Inother words, move the tax clock aheadyear. Second, Congress can try to collect 2 years taxes in year; in otherwords, levy an impossible burden of double taxation. These are the only twoalternatives. Proposals to collect the1942 liability in whole or in part in addition to current taxes over a period ofyears also involve some degree of doubletaxation and also continue the objectionable overhanging income-tax debt.For several months I have been studying this problem and am convinced thatthe only practical way to remove the personal income tax debt is to assess thepersonal income tax on current incomeand coll.,ct it out of current income. fthe problem is as serious as I firmly believe it is, our Nation can well afford topay whatever the cost may be, if any.This fundamental change in our incometax law is proposed for all years in thefuture, and the benefits of the changewould continue to accrue, both to taxpayers and the Treasury,Many economists and tax authoritieshave offered various proposals to get ourtaxes on a current basis. One of theoriginal sponsors of a pay-as-you-go taxplan and an outstanding tax authorityin the United States, Mr. BeardsleyRum , of New York City, has proposed theplan which has received Nation-wide ap proval. t is commonly referred to asthe Rum plan. Mr. Ruml is Chairmanof the Federal Reserve Board of NewYork and treasurer of R. H. Macy Co.,Inc. He was first formerly associatedwith the administrative branch of theFederal Government in 1930 as a member of Col. Arthur Wood's committee onemployment, and more recently as adviser of the National Resources PlanningBoard. He has also served as a memberof the advisory committee of the Division of Cultural Relations of the Department of State, of the advisory committee of the Coordinator of InterAmerican Affairs, and of the advisorycouncil of the Department of Agriculture.Mr. Chairman, before the end of theSeventy-seventh Congress I began studying the problems connected with gettingour tax payments on a current basis. Iapproached this subject with an openmind and studied every plan I could secure. I can definitely state that, in myopinion, just criticism can be levied atany or all of them. t was after thisstudy and research that I reached theconclusion that the Ruml plan offeredthe best solution to our problem of getting taxpayers current.Either the tax clock must be advancedyear or there must be a collection of 2years' taxes in year. My lmowledge ofthe economic problems of the Americanpeople convince me that our taxpayerscannot pay 2 years' taxes in 1. In mystudy of this problem I discovered manyinteresting things concerning our in come-tax law. Historically, our Federalincome-tax law goes back to a bill signedby President Lincoln on August 5, 1861.t was first announced as a war-revenue

measure and even at that early date oneprovision of the act provided for collections by withholding at the source. Theact was carried on the statute books forseveral years. In its early stages it wasdefinitely an excise tax or a duty and soconstrued by the courts. A most in formative statement in regard to theearly history of the income-tax law wasrecently written by Mr. F. Morse Hubbard, formerly of the legislative draftingresearch fund of Colu.. llbia University,and a former legislative draftsman inthe Treasury Department. This compilation of information concerning our in come-tax law is so well written that Iam making it a part of my statementand the record:I THE L."\l'COME TAX IS AN E._XCISE TAX, AND IN

COME IS MEaELY THE BASIS FOR DETERMININGITS Ai'\iOUNTThe first Federal income tax law was approved by President Lincoln on August 5,1861, a little less than 4 months after thebombardment of Fort Sumter and the President's call for 75,000 volunteers, and less thana month after the disaster at Bull Run. twas distinctly a war-revenue measure. Theact of 1861 (12 Stat. 292} provided for a taxto be levied, assessed, and collected in theyear 1862, the tax to be based on income forthe preceding year, that is, the year 1861.This tax, which was due and payable on orbefore June 30, 1862, was levied only for that1 year.In 1862, In order to meet the need forcontinued war revenues, Congress passed thesecond income-tax law. This act took effecton July 1, 1862, the day after the tax underthe act of 1861 expired. The act of 1862 ( 12Stat. 432) Which used the word duty in stead of tax, provided that this duty shouldbe levied, collected, and paid in the year1863 and In each year thereafter until andincluding the year 1866 and no longer(sec. 92}. Like the act of 1861 i t providedthat the tax (or duty) collected in each yearshould be based on the income for the preceding year (sec. 91). At the same time itcontained a provision for withholding at thesource, which will be referred to later on.The general pattern of the act of 1862was followed in the subsequent income taxlaws of this period, namely, the act ofJune 30, 1864 (13 Stat. 223), and its amendments, and the act of July 14, 1870 (16 Stat.256). Under each of these acts the tax tobe paid in any given year was based on theincome for tile preceding year, provision wasmade for withholding at the source, and thetax was to be in effect only for a limitedperiod. Under the act of 1864 the tax terminated in 1870, and under the act of 1870the tax terminated in 1872.The income on which the tax was basedwas defined as income from all sources,whether derived fron any kind of property,rei).ts, interests, dividends, salaries, or fromany profession, trade, employment, or vocation (act of 1864, sec. 116). Thus investment income, as well as other kinds ofincome, was included in the basis for measuring the tax.In sustaining the Civil War income taxlaws, the Supreme Court held that the taxbased on income was not a direct tax but wasan excise or duty and as such did not requireapportionment among the States. pringerv. United tates ( (1880) 102 U.S. 586). Thisdecision, rendered after tile income tax hadbeen thoroughly tested for a period of 10years, represents a deliberate determinationas to the f u n d m e n ~ l nature of the tax.The true character of the income tax wasat the outset so firmly fixed in the minds ofthose charged witl1 its administration thatfor 6 years the Treasury Department heldthat i f a person died at any time between


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2530 CO:NGRESSIONAL RECORD-HOUSF MARCH 27January 1 of one year and the date when hisreturn was due in the following year the in come for such period was not subject to tax,even though he may have made a return ofincome before his death in advance of thedue date (T. D. June 9, 1865, 2 Internal Revenue Record 54). This rule was not changeduntil1867, when it was held that such incomewas subject to the tax and should be returnedJ:;y the executor or administrator (T. D. Apr.6, 1867, 5 Internal Revenue Record 109; T. D.Jan. 1 1868, 7 Internal Revenue Record 59).See also Mandell v. Pierce (C. C. D. Mass. 1868,16 Fed. Cas. 576). The change was doubtlessprompted by two important considerations;first, the taxes expired by definite limitationwithin a very few years; and, second, personswhose tax had been withheld at the sourcewould already have paid their tax up to thedate of death. At any rate, the change didnot involve any modification in the conceptof the income tax as an excise tax based onincome.After a lapse of about a quarter of a century Congress again passed an income-taxlaw. The act of 1894 (28 Stat. 509, 553;Aug. 27, 1894) provided for a tax to belevied, collected, and paid from and afterJanuary 1 1895, and until the 1st day ofJanuary 1900 (sec. 27). Like the Civil Waracts it provided that the tax should be basedon the income received in the precedingcalendar year. Although the Supreme courtheld this portion of the act to be unconstitutional, i t still recognized that the incometax was in essence an excise tax. The Courtsaid that a tax on income from business,privileges, or employments, standing by it self, would be valid as an excise tax; but thetax on investment income was held to beinvalid because the Court regarded a taxbased on in,come from property as a tax onthe propertyitself and therefore a direct taxwhich must be apportioned among the States(Pollock v. Farmers Loan and Trust Co.(1895), 157 U. S. 429; 158 U. S. 601). TheCourt said that to sustain a portion of thetax while declaring the rest invalid, wouldleave the burden of the tax to be borne byprofessions, trades, employments, or vocations; and in that way what was intended asa tax on capital would remain, in substance,a tax on occupations and labor. We cannotbelieve that such was the intention of Congress (158 U. S. 601, 637). So the entireportion of the act relating to Income taxwas declared invalid.'

1 It must be remembered that the Courtwas not appraising economic theories, butwas construing provisions of the Constitution. The first related to the power ofCongress:To lay and collect taxes, duties, Imposts,and excises, to pay the debts and provide forthe common defence and general welfare ofthe United States; but all duties, imposts,and excises shall be uniform throughout theUnited States (art. I, sec. 8, subdiv. 1).The second was the provision that:No capitation, or other direct, tax shallbe laid, unless in proportion to the census ofenumeration herein before directed to betal{en (art. I, sec. 9, subdiv. 4).Thus the Constitution made a distinctionbetween taxes on the one hand, andduties, Imposts, and excises on the other.Uniformity was required in the case of thelatter, whereas apportionment according topopulation was required only in the case oftaxes. The only taxes generally regardedas direct were poll taxes and taxes on property. The only direct taxes which had beenimposed by congress prior to 1894 were taxeson lands, houses, and slaves. See Foster andAbbott, A Treatise on the Federal IncomeTax under the act of 1894, pp. 27 ff. TheCourt had no difficulty in classifying a tax onincome as an excise tax. Its objection to theact of 1894 was doubtless based on the theorythat a tax on rents was not In reality an

There are still those who thinlt that in thiscase the Court went further than necessaryin treating a tax based on income from property as a tax on property itself, and that inany event the excise-tax principle shouldhave been applied to rents and other investment income, as was done under the ClvilWar acts. In other words, the making andholding of investments, while perhaps nottechnically a business, is, at least, a kind ofactivity or privilege which can properly besubjected to an excise tax measured by reference to the income derived therefrom.That investment income may be includedas a part of the basis for measuring an excisetax was recognized by Congress in the actof August 5, 1909 (36 Stat. 11, 112). This actprovided That every corporationshall be subject to pay annually a specialexcise tax with respect to the carrying onor doing business by such corporation,* equivalent to 1 percent upon theentire net income over and above $5,000 re ceived by it from all sources during suchyear, exclusive of amounts received by it asdividends upon stoclt of other corporations subject to the tax hereby imposed; . Certain corporations, such as religious, charitable, and educational organizations, etc., were specifically exempted fromthe tax.The tax imposed by this act was really anincome tax in that it was based on net in come, but was given the correct designationof excise tax. t imposed with respectto carrying on or doing business; and itshould be noted that the basis was net in come from all sources, except dividends fromother corporations subject to the tax. Suchdividends were excepted not because theyconstituted investment income but becausethey represented income which had alreadybeen taxed. The sole test of taxability underthis act was whether a corporation was en gaged in business. I f it was so engaged,then all the Income (except dividends), in cluding investment income as well as strictlybusiness income, was used in measuring thetax. The Supreme Court held that the factthat the tax was measured by net income,and that income from nontaxable propertyor property not used in business was includedIn computing net income, did not preventthe tax from being construed .s an excise taxwhich did not require apportionment. Fl intv. Stone Tracy Co et al. (1911) 220 U.S. 107).So far as the objections raised in the Pollock case are concerned, the principle appliedto corporations under the act of 1909 withthe approval of the Supreme Court mighthave been extended to individuals engagedin business. In that way investment incomeof most individuals as well as of corporationscould doubtless have been brought under theterms of the act. And the field of Incomecould have been completely covered by ap plying the principle that the ownership andmanagement of investment property is anactivity or privilege with respect to whichCongress may impose an excise.'However that may be, Congress chose toremove all doubt by an amendment to theConstitution. The resolution embodying theproposed amendment (S. J. Res. 40, 36 Stat.184; 61st Gong., 1st sess.) was deposited inthe Department of State on July 31, 1909, afew days before the act of 1909 was approvedby the President. The amendment was dulyratified and became effective as the sixteenthincome tax but was a direct tax on lands andbuildings. (See Foster and Abbott, op. cit.,pp. 117-118.)'That such is the case is clearly indicatedby the recent provision in the Revenue Actof 1942 which allows deductions for expensesIncurred in the management of investments(sec. 121). The retroactivity of this provision suggests not merely the declaration ofa new policy but the recognition of a fundamental principle.

amendment en February 25, 1913. (Secretary of State's Certificate of Adoption, 37Stat. 1785) .The sixteenth amendment authorizes thetaxation of income from whatever sourcederived -thus taking in investment income- without apportionment among theseveral States. The Supreme Court has heldthat the sixteenth amendment did not extend the taxing power of the United Statesto new or excepted subjects but merely re moved the necessity which might otherwiseexist for an apportionment among the Statesof taxes laid on income whether it be derived from one source or another. So theamendment made it possible to bring investment income within the scope of a generalincome-tax law, but did not change the character of the tax. t is still fundamentally anexcise or duty with respect to the privilegeof carrying on any activity or owning anyproperty which produces income.The income tax is, therefore, not a tax onincome as such. I t is an excise tax with re-.spect to certain activities and privilegeswhich is measured by reference to the in come which they produce. The income is notthe subject of the tax: it Is the basis fordetermining the amount of tax.The purpose of ,the income tax Is to raiserevenue in the year of its levy. I t is amethod by which some of us make annualpayments on account of the governmentalexpenses and the public debt of all of -contributions to a common fund to preservethe blessings of liberty. The great Frenchpolitical philosopher and jurist, Montesquieu,stated the fundamental principles of taxation as follows:The revenues of the State are a portionthat each subject gives of his property Inorder to secure, or to have the agreeableenjoyment of, the remainder. (Spirit ofLaws, book XIII, chap. 1.The income tax is now a permanent partof our tax structure, and Is designed to provide for such contributions, or payments,year after year, indefinitely. The tax forany given year is the tax which is to providerevenue for that year. Strictly speaking,then, the 1942 income tax was the taxpayable in 1942; and the 1943 income taxis the tax payable in 1943.The amount of the payments for any yearis determined by applying certain rates toa specified basis. Both of these factors arematters of legislative policy. Congress mayf ix any rates which are not confiscatory andmay adopt any basis which is reasonable.Hitherto the previous year's income hasbeen used as the basis. But the basis, aswell as the rates, may be changed at anytime. In these matters of policy, the Constitution, both before and since the Sixteenth Amendment, has left to Congresspractically unrestricted freedom of choice.'

Under our existing Federal in come-taxlaw which has been operating for manyyears, the amount of income tax payablein any year by an individual taxpayeris based, not upon the income of the taxpaying year, but upon the income of thepreceding year. This method whereby

Brushaber v. Union Pacific Railroad Co( (1916) 240 U.S. 1); William E Peck and Cov. Lowe (1918 247 U. S. 165); Eisner v. Ma -comber ((1920) and 252 U.S. 189). f the tax should be construed as a taxon income as a specific fund the disappearance of the fund before the date of assessment would prevent the collection of thetax. (See Foster and Abbott, op. cit., p. 85.) I f the income iS merely the measure ofthe tax,it is clearly quite immaterial whetherthe income that is adopted as a measureis that of the past, or of the present, or ofthe future, provided only it is practicallyascertainable. (Foster and Abbott, op. cit.,p. 87.)


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1943 CONGRESSIONAL RECORD-HOUSE 25a t&Xp?.yer n1ust use the previcus year si:lcsme as a base fol the next yes"r's taxpayments results in many inequalitiesfmd injustices. Vvhen the tax rates werelow and the exemptions very large thesainjusticas weie felt only in a small number of cases. Under greatly increasedtax rates and reduced exemptions, theproblems presented by this system havemultiplied to a degree tr..at not onlyworks a great hardship on large nunlbers of taxpayers, but might readilyprove very embarrassing to the FederalTreasury.Few people realized how much moneythey owed the Government for taxes onlast year s income until they made outtheir income-tax returns. There seemsto be a prevailing impression that whenyou pay your quarterly income-tax payments everything is paid until the taxesfor the next quarter are due, or at leastthey assume they are not in debt to theFederal Government. This is an erroneous impression. The fact is that everycitizen -is indebted to the Federal Government for last year s taxes until theyare fully paid, and more than that, thetaxpayer is indebted to the Federal Government for the accrued taxes due in theyear in which he is paying income taxes.'l'he income-tax debt hurts most whensiclmess strikes, when a shift of employment reduces your salary or when youhave lost your regular income.Under the present plan of taxation aman this year pays out of this year sinco'me the taxes assessed against lastyear s income. In 1944 he is requiredto pay a tax out of his 1944 income, butbased upon his income for 1943. Underthe present system it can truthfully besaid that a dead man pays income taxesbecause his estate is liable for incometaxes accrued for the year previous tohis death. Such a situation-to put itmildly-is not one in which we as aNation can t lw pride.It is true that a man does not havet0 die to face a similar anomalous position. Any man who at the end of theyear has the misfortune to cease to re ceive an income due to an accident,illness, or other misfortune which mightdisqualify him from his earning capac.ity is, under our present law, compelledduring that year to pay an income taxon last year s income. Assessing anincome tax to be paid in 1 year uponthe income of a different year departswidely from the ability-to-pay principleof taxation. Our income-tax law isbased on the sound philosophy of abilityto pay-that is, it was based on thatsound philosophy in 1913, when it wasfirst approved by our Nation. Theoretically, that principle holds true today, butfrom a practical standpoint I am not socertain that it will stand analysis. Demanding payment of income taxes fromdead men or those who have ceased tohave income is a complete violation ofsuch a principle. Ability to pay .relatesto the ability in the year in which payment must be made and not to the condition in some other year. Theoretically, a man sets aside a part of his in come for the tax that the law requireshim to pay in the following year. Thismay be good theory, but does not w o r ~

out in pract ce. It was tl1e intention ofthe framers of our income-tax law in1913 to use 1913 merely as a base for thetax payments to be made out of the nextyear s income. This is the practicaleffect of the law today. The fact thatthe law now allows all of the year 1943to pay the assessment on 1942 incomesclearly indicates that Congress intendsthe tax to be paid out of 1943 income.I do not know of any better illustration of how setting the tax clock aheadyear will work than to refer to ourdistingUished chairman who was herewhen the Congress passed the first in come tax law in 1913. He was a Memberof Congress at that time. Bear this inmind, that if we had had the Ruml planin 1914 and moved the tax cloclc up 1year, he would not be 1 better ofi' today,as far as tax money is concerned; hewouid not have gained a dollar and hewill never gain a dollar until his incomeceases or until h ~ s income decreases.Mr. DaUGHTON. Mr. Chairman, willthe gentleman yield? He has referredto me.Mr. CARLSON of Kansas. I yield toour distinguished chairman.lVIr. DOUGHTON. f my tax is forgiven for 1942, when will it ever be paid?When will the Government ever get it?The gentleman has gone too far bac r.Come right down to brass tacks. Saynow my tax in 1942 is forgiven and wipedout, $2,500. Then I would keep thatmuch money, wou d I not? When wouldthe Government ever have me pay it? Iwould keep it in my pocket. Whenwould the Government ever get it? Thatis a fair question.Mr. CARLSON of Kansas. The distinguished chairman paid his taxes in1941. He paid them on the basis of earn-- ings back in 1940. He paid his taxes in

1942 on his 1941 income. There is noquestion about that. We pay taxes everyyear. He does not gain and would notgain anything until his income decreasesor ceases.Mr. DOUGHTON. I did not pay mytax in 1913 because it was not due untilthe next year.Mr. CARLSON of Kansas. That isright.Mi DOUGHTON. It was not due. Ido not ordinarily pay my debts until theyare due, but I do try to pay them whenthey are due. I do not try to dodge themor run out on them. I pay them.Mr. CARLSON of Kansas. The chairman knows that the taxes he paid in

1914 were based on his income for 1913.That was the standard they set up; thatis what they determined he should paya tax on. But he paid them out of 1914income.Mr. DOUGHTON. I had no notionof interrupting the gentleman becausehe is a very fine and able member of thiscommittee.Mr. CARLSON of Kansas. I thankthe gentleman for his compliment.Mr. DOUGHTON. However, as longas the gentleman referred to me I thinkhe ought to answer my question. f I getout of my 1942 tax, if it is abated, whenwould I ever pay it? When would theGovernment get it?

:r u C.:-' .RLSCN of K a ~ s a s The cl1al:lan v;ill cever receive a:;.1y t x benefrom this program until his incoceases or his income declines; net 1 ce~ . I r . DOUGETON. I challenge thstatement absolutely. f I keep t inpocket, I have benefited.Mr. CARLSON of Kar:sas. The gtleman does not have any r,:;.oney inpocket in this at all, becat;se he will s

be paying tax in 1943 under my bill.Mr. DOUGaTOi'T. The Governmnever gets it.Mr. KJ:.JUTSON. I\-'l:r. Chairman, wthe gentleman yield?Mr. CARLSON of Kansas. I yieldthe gentleman from lViinnesota.Mr. KNlJTSON. Will the gentleminform the House just what his taxwould be this year under existing land what they would be under his biMr. CARLSON of Kansas. I will mathis statement because it seems so clef there is any man on this floor wthinks he is going to have some tmoney left in his poclcet i f he votesthis bill o mine, he is just mistalcenthis reason. You do not get out of a dlar of tax. You pay just the same taxin 1943 under my bill that you wouhave paid on the 1942 liability in 19under the present law. The only diffence is that it is your current year's taxunder my bill. You are current insteof being year behind.:Mr. GEARHART. Mr. Chairman, wthe gentleman yield?M:r. CARLSON of Kansas. I yieldthe gentleman from California.Mr. GEARHART. You will pay tsame ta.'

irs congressional record 1943 income

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